Dr Chan: Focus On Financial Performances Of Good Quality Counters

The US

The Federal Reserve’s (Fed) latest meeting in 25-26 July received somewhat limited media attention as market participants had already anticipated that the Fed would leave interest rates untouched. On days that followed, the Dow resumed its upward climb to hit new record territories and some have attributed the Dow’s strength to the Fed’s decision. However, the conjecture is flawed since the market would have already priced-in this expectation.

Corporate earnings were in fact the main catalysts driving the US stocks in the past few days. Market indices, composing of a portfolio of companies, have been rising and falling with their constituents’ earnings announcements. Owing to the difference in composition, the three US major indices – Dow Jones, Nasdaq and S&P 500 – are not entirely correlated and hence it can be quite challenging for our local stock market to draw cues from.

Investors paying more attention to US stocks would have concurred that earnings performances have been the main influence in the recent movements of US share prices. Not coincidentally, it is also the season for companies to release their 1H17 financial results.

Amazon, for example, quickly retreated from its peak of US$1068.34 per share to US$1014.54 upon its earnings announcement on 27 July. Its founder, Jeff Bezos, whose networth hit US$91 billion overtook Bill Gates to be the world’s richest man – for a brief moment – before Amazon’s stock took a turn. Amazon’s poorer-than-expected financial results also sent negative sentiments throughout the US market which dampened Singapore’s and Hong Kong’s market performance on the following trading day.

As seen from the Amazon example, financial performance is still the primary element that affects the stock market. Going forward, whether the Dow continues its upward trajectory or conversely loses some ground, largely depends on the earnings performances of other constituents bound to release their results in coming weeks. Of course, constituent stocks driven to high valuations by speculation prior to their earnings announcements would also affect how the Dow pans out.

Take for instance Hong Kong-listed AIA Group (AIA) which recently announced a splendid set of results. Despite that, its shares were sold down once the market opened as investors took the opportunity for profit-taking. Nonetheless, the sell-down also provided investors accumulating opportunities for a good quality company at lower prices.

Politically, we see that US President Trump is facing increasing pressure to deliver some legislative success. After months of wrangling, Trump’s healthcare bill once again failed to muster enough votes from the Senate – with a Republican majority – to repeal and replace Obamacare. That said, I do not expect Trump to give up so easily and he will likely include some new amendments to urge Republican senators to get back on the bill.

Ultimately, I believe Trump will succeed in pushing through the healthcare repeal bill though it will likely take more time. But the recent major defeat also serves as an example that Trump will likely face major impediments in other proposals such as cutting taxes and boosting infrastructural spending.

Many might think that the ongoing dynamics in US Congress would adversely impact the US stock market but I beg to differ. This is because the US tech sector is still delivering really solid growth while the Fed’s dovishness on future interest rate hikes and balance sheet runoff has also given some support to the stock market. Thus, the delay in tax cuts and infrastructural spending would only have a limited impact on the stock market lest for the time being.

Investors should also not be too worried about the allegations relating to Trump-Russia collusion. It is mostly media-fueled frenzy to suggest that Trump would be impeached owing to his ties with Russia. This is because the Republicans make up a majority of 52 percent in the US Senate and it would have to take at least two-third of the Senate to impeach the US President. In other words, at least 19 Republican senators have to “defect” in order to lead to Trump’s impeachment. But by voting against a Republican President would also effectively mean to give up the Republican Party’s administrative power – a scenario that is highly unlikely.

Hong Kong

Not long ago, Hong Kong’s Hang Seng Index (HSI) extended its rally and broke the 27,000-point mark and many have dubbed this as the “Golden Rally 2.0”. While the HSI is nearing its 2015-historical high, “Golden Rally 2.0” is nothing similar to the “Golden Rally” of 2015.

In 2015, the HSI was driven sky-high by bouts of speculation for all sorts of stocks. There were also a massive number of retail investors that placed their bets on “junk” or “scam” stocks and shell companies. However, this time round, the rally in HSI is powered by a mere handful of good quality counters and in particular by three heavyweights – Tencent Holdings (Tencent), HSBC Holdings and AIA.

Unlike “junk” stocks that have died down, good quality counters like Tencent and AIA have surpassed their historical high of 2015. Retail investors that speculated and held onto “junk” stocks would have lost immense opportunities and faced even more distress in the recent penny stocks crash where a number of these “junk” stocks lost more than 90 percent of their value.

But HSI’s “Golden Rally” in 2015 was nothing compared to the rally of China’s Shanghai A-shares. In mid-2014, I published a book to encourage investments into Shanghai A-shares, through the newly established Shanghai-Hong Kong stock connect. In less than a year, the Shanghai Stock Exchange (SSE) Composite Index more than doubled from 2,000 points to higher than 5,000 points.

During the period, the HSI also rose from 23,000 points to 28,000 points. But in percentage terms, it was only about 20 percent compared to the 150-percent euphoric rise of the SSE Composite Index. Today, the SSE Composite is sitting at about 3,200 points, a far cry from its 2015’s historical high.

The bubble could all be attributed to the establishment of the Shanghai-Hong Kong stock connect. Before the establishment in July 2014, the SSE Composite index was only at about 2,000 points. Just five months after the establishment, the index broke to 3,000 points and by June 2015, it extended beyond the 5,000-point mark. Meanwhile, the HSI was fluctuating around 23,000 points until March 2015, before it really began climbing towards 28,000 points. As such, compared to 2015, the current rally is built up of a different formation and its price action is also dissimilar and hence what we are seeing now is not “Golden Rally 2.0”.

Currently, the local stock market shares a rather similar tale to our Hong Kong counterpart as good quality counters are seeing their stocks gaining more momentum. Unfortunately, Singapore’s stock market does not boasts of strong stocks in “new economies” like Tencent, which the latter rose about 500 times since it listed 15 years ago.

That said, to identify good quality local counters is not a daunting task. All you have to do is flip into Shares Investment magazine and filter for them in the section of “Hitting 52-Week High”.